Guest post: America's giveaway to rich foreigners continues

Guest post by Brad Barros, Attainium Capital Development

A national law firm recently approached me to develop a privately owned insurance company (“captive”) for participants in the U.S. government’s EB5 program. Historically, the program afforded wealthy foreigners the ability to obtain a green card by investing at least $500,000 into “Targeted Employment Areas” and developing new “certified” commercial enterprises in the United States that create or maintain a minimum of 10 U.S. jobs.

While the EB5 program was developed to encourage entrepreneurial development and job creation, my preliminary research uncovered that many participants today are simply investors lending $500,000 over a modest five-year term to U.S. real estate developers constructing HUD projects. These developers access the funds for a mere 100 basis points per annum, and then use the borrowed funds to cover soft costs and other expenses. Essentially, the EB5 program as marketed by some immigration attorneys trades the benefits of American residency for the short-term loan of cheap dollars, in order to fund U.S. government-subsidized projects. Historically, taxpayer -supported housing programs such as these do not create long-term jobs, and are nearly guaranteed to succeed when Uncle Sam foots the bill, thereby further eliminating the entrepreneurial and efficacious job creation aspect behind the intent of the federal program.

EB5 in this form simply represents an opportunity to “invest” in the government subsidized infrastructure of America, while obtaining permanent residency status, without having to actually build, sustain and grow anything. The “investors” simply act as short term or bridge loan financiers.
I initially passed on the opportunity to create a captive insurance plan insuring that the investors would receive a return of their investment at the end of the five-year term. Beyond the subjective issues of morality, I examined the more intellectually challenging question, which was whether for tax purposes “insurable risk” would include financial guaranty insurance, given the overall risk-free nature of this application of the EB5 program.

It's a well-known precedent that risk is a prerequisite for insurance. However, it may well be possible to have insurable risk within an investment. Insurance pro Randy Beckie, CPA, notes “given freedom of contract, one may design insurance contracts to hedge the same risks as a forward call option on a foreign currency exchange contract; the commodities future contract; or an interest rate derivative contract. Each (if properly constructed) could satisfy the long-standing tax definition of insurable risk because it contemplates the fortuitous occurrence of the stated contingency.” (Commissioner v. Treganowan, 183 F.2d 288, 290-291 (3d Cir.) cert. denied, 340 U.S. 853 (1950)). In essence, Randy points out the false premise of a dichotomy between insurable versus investable risks.

The challenge of harmonizing insurance with certain financial risks can lead to choosing the right or wrong exit on the highway. How does one know which way to turn? The answer begins by asking the right questions.

In a recent Technical Advice Memorandum (TAM), the IRS positioned that a risk that stemming from an investment contract cannot also be the object of an insurance contract because these types of risks do not contemplate a casualty event. From the IRS’ standpoint, price volatility within an investment is investment risk; not insurable risk. However, a financial risk could potentially qualify as an insurance risk if the financial risk was both fortuitous and accidental.

By applying the above understanding of insurable risk to the EB5 U.S. Greencard Scenario, the relevant inquiry as to the efficacy of an insurance program assuring a return of funds to the foreign investors includes whether or not an insurance policy (as defined for tax purposes) would specifically spread the risk protecting their “business investment”.

I posed this question to several leading tax authorities who uniformly concluded that the answer was "no", given in part, because of the near guaranteed nature of the investment.

Accepting their response on its face demands that we begin a new line of inquiry. If there is no real risk to investors associated with the EB5 program as utilized in the above-mentioned form, why is America extending extraordinary benefits to wealthy foreigners on the cheap? Does it help or hurt inner city poor when temporary construction jobs often aimed at currently employed working-class individuals, are borne from EB5, at the expense of creating permanent jobs imbedded within the frame work of the very community that cries out? And while insurance as defined under the tax code may not be viable to the foreign financiers, what does it say of a tax regime that promotes a program offering wealthy real estate developers access to essentially “free” funding, that in and of itself is government subsidized for risk-free projects that only exist because of handouts from The Beltway? The answer to these moral and tax-based questions are far more complex than the determination of what constitutes insurance, presuming these questions can be answered at all.